Refineries will have to substantially under utilise their capacity in 2009 as demand for petrol, diesel and other refined product subsides, Bank of America subsidiary Merrill Lynch has said in its new report.

Interestingly, the countries that will suffer due to this are not the oil producing states.

Merrill Lynch said the refineries in countries like India, China, the United States and Vietnam in 2009, many of them government run, will bear the brunt of low profits on refined crude.

The situation will acerbated by additional refining capacity coming online in 2010 and by new biofuel supplies into the markets, it said.

"To eliminate petroleum product oversupply, we estimate that global refinery utilisation rates may need to fall to 81 per cent this year, down from 84 per cent last year. By region, we see incremental excess supply in Asia due to the refining capacity that is starting up in India, China and Vietnam. By product, middle distillates could suffer more than other petroleum products this year before they recover in 2010," it said in the report.

Low prices of refined crude products, however, will be beneficial to the GCC.

The low refining capacity in the region forced it to import petrol ranging in between 100,000 barrels a day and 200,000 barrels a day, Washington-based PFC Energy had recently said. Most Gulf states also import diesel and fuel oil, the report said.

In a 21-page report Merrill Lynch said that while crude oil prices could move higher in the second half of 2009, petroleum product prices are unlikely to experience similar upward pressures.

"In our view, refining margins will lag any price recovery in crude. Following years of robust consumption growth for light products and a strong margin environment where demand outpaced supply," it said.

The world will see five million barrels per day of spare refinery capacity in 2009, Merrill Lynch said.

"With the recession-induced demand collapse, this new capacity could not have come at a worse time. On our estimates, global demand for petroleum products will fall 5.2 million b/d below capacity this year, increasing the flexibility of the refining system."

Refining margins (profit made by refiners) in the US and Europe stayed well supported during the first two months of 2009, but weakened in March.

"In part, the support to margins in January and February came from weather-related demand and a quick reaction on the side of refiners to the growing oversupply problem. Faced with collapsing economic-related demand, refiners implemented heightened maintenance and some discretionary run cuts, although these output reductions have not been sufficient to support margins in March," it said in its report.

Fears of low profits will force refiners to under utilise their capacity, it said.

"Looking forward, the weakening margin environment suggests that low European margins could force over 500 thousand b/d of capacity off line in April (3.3 per cent of the total) and almost 670 thousand b/d in May. Refineries in the United States are also reducing output due to the deterioration in the market."

Profits on gasoil (a fuel oil obtained as a distillate) may fall further as Asian distillate barrels start to arrive providing a strong signal to European distillate-focused refiners to cut back output, it said.

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